Essays on the Economics of Electricity Markets

Abstract

The thesis at hand includes three distinct essays that analyze economic issues related to liberalized electricity markets. In the first essay, the effects of capacity mechanisms on the market structure in electricity markets are investigated. We consider a model with dominant firms and a competitive fringe and analyze the impact of price caps and capacity mechanisms on investments and market concentration. Whereas in static models lower price caps reduce the potential to exercise market power, we show that in our two stage model with endogenous investments, lower price caps result in an increase in market concentration, a higher frequency of capacity withholding and larger profits for the dominant firms. The second essay analyzes cross-border effects of capacity mechanisms. We consider a model with two connected countries that only differ in their capacity mechanisms, namely strategic reserves or capacity payments. In both countries, competitive firms invest in generation capacity before selling electricity on the spot market. We show that different capacity mechanisms lead to redistribution effects such that the country with strategic reserves is worse off, meaning the consumer costs are higher in this country. The third essay deals with the value of wind power and, more specifically, with the impact of the spatial dependence of wind power on its market value. We create a stochastic simulation model for electricity spot prices that captures the full spatial dependence structure of wind power by using copulas. We then calibrate the model with German data. We show that the specific location of a turbine, i.e., its spatial dependence with respect to the aggregated wind power in the market, is extremely important in determining its value. Many of the locations analyzed show an upper tail dependence that adversely impacts the market value.